Thursday, May 4, 2017

Horror and Death in Venezuela

This is what socialism looks like mixed with hyperinflation and price controls. The masses are desperate. Below young man wrapped in flames and another crushed by a police force tank yesterday as riots continue throughout the country.

The Venezuelan government, though it doesn’t claim to be full-fledged in its devotion to Marxism-Leninism, has been pursuing as absurd an economic policy mix as its Soviet predecessor. It has insisted for years on maintaining drastic price controls on a wide range of basic goods, including food staples such as meat and bread, for which it pays enormous subsidies. Nonetheless the Venezuelan government, like the Soviet Union’s, has always felt it could afford these subsidies because of its oil revenues.

But as the oil price has fallen by slightly more than half since mid-2014, oil incomes have fallen accordingly. And rather than increase oil production, the Venezuelan government has been forced to watch it decline because of its mismanagement of the dominant state-owned oil company, PDVSA.

And now Venezuela seems intent on repeating the Soviet folly of the late 1980s by refusing to change course. This is allowing the budget deficit to swell and putting the country on track toward ultimate devastation...

Venezuela already is dealing with massive shortages as a result of its controlled prices, because the government can no longer afford its own subsidies. But it will get worse from here. Maduro seems intent on printing money like crazy, so the next step will be hyperinflation.Maduro seems intent on printing money like crazy, so the next step will be hyperinflation. Inflation is already believed to have reached 700 percent a year, and it is heading toward official hyperinflation, that is, an inflation rate of at least 50 percent a month...

One alternative could be a preemptive political overthrow of the Maduro regime fueled by public discontent or that the rulers just flee the country. Another possible endgame would be that the country runs out of international currency reserves and defaults on its foreign debt. That would deprive Venezuela of all foreign credit, and the natural consequence would be a complete collapse of imports and the exchange rate of the bolivar, the country’s currency.

Either way, the Maduro regime is not likely to survive for long because it won’t be capable of making the necessary adjustments that avoid abject economic misery for most of the population, and the pressure on it will eventually become intolerable. A successor government will have to make the adjustments instead. But regardless of the nature of the new government, the choices it has available to it won’t be large: In extreme economic crises, the actual policy choices are few.

The budget needs to be brought close to balance. That can only be done by cutting expenditures, because more taxes cannot be collected in the short term. The key cut will have to be to the elimination of price subsidies. Venezuela’s foreign aid projects must be cut as well. That might suffice to balance the budget.

At the same time, the exchange rate needs to be unified around the market equilibrium, regardless of whether the exchange will be floating or pegged....

The collapse of the Maduro regime will not be pretty, but it is difficult to see how it can be avoided. While the politics might be difficult to predict, the main features of a severe economic crisis are quite predictable. The key question is how fast a new government will manage to do the right things.